The mutual fund industry has been growing at a rapid pace with millions of investors tuning to these investment options to achieve their financial objectives. One of the reasons why mutual fund investments have become so vastly popular among retail investors is due to the opportunity of earning they offer to investors – thanks to the power of compounding. However, there are certain things that can go wrong in your financial journey to create wealth. In this article, we will understand the common mutual fund investment mistakes that an investor is likely to make in their investment journey.
Common mutual fund investment mistakes to avoid:
Following are a few common investment mistakes that you as an investor must try to avoid:
- Over diversifying – In the name of diversifying one’s investment portfolio, several investors often end up overdiversifying their investment portfolio which could be quite catastrophic to one’s portfolio. Though, it is important to diversify when you invest in mutual funds, you must not overdiversify. Overdiversifying will only add to your burden of tracking these mutual fund investments.
- Timing and speculating the markets – To earn maximum returns on their mutual fund investments, several investors aim to sell their investments when the markets are at their peaks. This concept is known as timing the markets where in an investor buys low and sells high. However, this investment concept is easier said than done. There is a high chance that you might end up losing big while aiming to time the markets. This is why several experts advise their clients to invest their time in the markets rather than timing the markets. What we mean to say is that you might consider staying in markets for long and investing in mutual funds through SIP mode of investments which nullifies the need to time the markets.
- Not focusing on asset allocation strategy
Investors often get carried away and invest in the securities that are not suitable to their investment portfolio in a hurry to not miss the perfect opportunity. Nevertheless, an investor must understand that however good an investment opportunity might seem to them, they must not ignore their asset allocation strategy and risk appetite. Instead of following the herd and investing in investment options that do not serve your investment goals, an investor must stick to their asset allocation strategy. - Not reviewing their financial portfolio
An investor often lives in a bubble by assuming that their role as an investor ends at drafting a proper financial plan and investing in the right securities that align with their investment portfolio. However, as important as the above-mentioned parameters are, equally important is the need to review one’s investment portfolio. Reviewing one’s investment portfolio will help an investor to identify the funds that are underperforming. An investor might even need to rebalance their investment portfolio due to either change in their financial goals or other parameters or due to some external change. Hence, experts often advise investors to review their financial portfolio at least once or twice a year to understand how their investments are performing against their underlying benchmark indices and other peer funds.